Copies of CLN Newsbriefs that were emailed to subscribers between regular issues of CLN.

July 21, 2008

THE CHA SUMMER SHOW

The show was smaller in terms of exhibitors, booths, and buyers, but larger than CLN expected, given the state of the economy and reports of substantial declines at the Atlanta and Dallas gift shows. This morning there was a report that even convention attendance in Las Vegas is down 10%. CLN should have specific show numbers in the next issue.

Despite the smaller size, a member of Sierra Pacific Crafts, the industry's most successful group of independent retailers, told CLN that SPC members who attended all reported finding exciting new products for their stores. Buyers were was cautious, but definitely placed orders.

Scrapbooking is down, but leveling. One key scrapbook vendor told CLN, "Attendance was down, but the market is where it should be. We no longer have retailers rushing in, placing a big order, then going out of business in six months."

There were three major topics of conversation.

1. Inflation. Some vendors seemed almost in a state of shock as they told CLN how the cost of their raw materials has skyrocketed. Double-digit increases two and three times this year were not uncommon� and warnings that more increases were on the way.

"If there is any good news in all this," a major vendor told CLN, "it's that the retailers finally realize we have to pass along some of these increases. For a long time they wouldn't accept any increase; now they finally are beginning to understand."

Part of the chains' more-understanding attitude is that they are feeling it first hand. As they attempt more direct importing, they are seeing price increases as inflation increases in China. The products cost more, as does the shipping.

2. Recession. Every retailer CLN talked to said sales were down. In some cases traffic was up, but the average sale was lower. One craft retailer told CLN, "I sell Yankee candles. One of the more expensive candles is a half-tank of gas. Customers are thinking like that these days."

3. Orlando. The '09 Summer Show is moving to Orlando, on a Tues., Wed., Thursday in late July, followed by a two-day consumer show. (As CLN understands it, trade exhibitors will not be required to exhibit at the consumer show.) The majority of attendees CLN talked to opposed the move, but that might be because they could drive to Chicago. The next issue of CLN will include an opportunity for you to vote on the move.

Many of the specific issues of the consumer show � who can exhibit, who can sell, how will the show be promoted, etc., have not been completed, but that didn't stop the rumors from spreading like wildfire. (Advice: Withhold judgment about the consumer show until all of the details have been determined.)

May 28, 2008

CRUNCH TIME FOR THE ORPHAN WORKS BILLS

Next week (June 4-5) a group of concerned citizens opposed to the Orphan Works bills in Congress will lobby members of the Senate and House of Representatives. The organizations officially opposed to the legislation are the Craft & Hobby Assn., The National NeedleArts Assn., the Society of Decorative Painters, and a wide range of groups representing artists, designers, photographers, illustrators, and cartoonists.

CLN has learned from David Brog, former Chief of Staff for Senator Arlen Specter (R, PA), that to get the attention of a member of Congress, the magic number of communications (phone calls, letters, emails, postcards, etc.) is 1,000.

It would be particularly helpful if there were 1,000 or more communications received by the time the lobbying group meets with Senators.

All of the members of the House and Senate have an easy, quick way to email them through their websites. Fax and phone numbers will be on the site, too. (If you call, make sure the staffer writes down your name/address.)

To send a postcard to your Senator, all you need write is "Please vote NO on S-2913," and your name and address. However, do NOT send it to his/her office in Washington, DC, where it takes as long as two weeks (because of scanning and screening) before it's delivered to the Senator's office. Instead, go to www.senate.gov and click on "Find Your Senator" in the upper right-hand corner. That will lead you to your Senators' websites. There look for the address of a district office (one in your home state) and mail the postcard there.

The procedure is similar for contacting members of the House. Go to www.house.gov to be directed to your House member's website. The House version of the bill is H.R. 5889. Again, send it to a local office, not Washington, DC.

The two Senators who introduced the Senate version are Orrin Hatch (R, UT, http://hatch.senate.gov/public) and Patrick Leahy (D, VT, http://leahy.senate.gov).

Want to join the lobbying effort in Washington in person? (Appointments have been made with various Senators.) For info about the trip and how you can participate, call Joanne Fink or Marisa Shapiro at 407-330-4465 or email graphics@lakeside-design.com.

To learn more about the harm the Orphan Works bills would cause: 1. Go to CLN's site, www.clnonline.com, and read "More on the Orphan Works Bills" in the current issue. 2. Click on Designing Perspectives in the left-hand column. 3. Click on Newsbriefs, also in the left-hand column, and read the May 8 issue.

May 8, 2008

ORPHAN WORKS BILLS TO PASS?

The Orphan Works bills are moving through Congress. These bills (H.R. 5889 in the House of Representative and S. 2913 in the Senate) could do serious harm to the industry, making it impossible for designers and manufacturers to protect their designs. The House version passed unanimously in a subcommittee and the Senate version is being considered now by a subcommittee.

To read an explanation of the harm these bills could do to the industry, visit www.clnonline.com and click on Designing Perspectives in the left-hand column.

To read the current status of the bills, visit http://capwiz.com/illustratorspartnership/home. The site also makes it remarkably easy (less than five minutes) to email your House and Senate representatives.

Brenda Pinnick of Brenda Pinnick Designs and a member of the CHA Designer Council and on the Professional Advisory Committee for the Art Institute of Atlanta, summed up the problem:

"In my wildest imagination, I cannot imagine how a designer/artist will be able to continue offering art and design for this industry. People who have spent all their lives and devoted their professional expertise to this industry will be left without protection and a livelihood. EVERYTHING will become "clip art" and it will put the art into the hands of people who can and will, claim it as their own."

JO-ANN: STRONG FIRST-QUARTER SALES

Jo-Ann reported net sales for the first quarter ended May 3, increased 5.2% to $446.1 million from $424.2 million in the prior year. Same-store sales increased 4.5%. The company will report earnings for its first quarter on May 28.

APRIL SALES: BETTER THAN EXPECTED, SORT OF

According to Thomson Financial, 19 retailers beat same-store sales estimates, while nine missed.

Thomson Reuters said more than two-third of the 33 reporting retailers exceeded estimates, while one-third missed, MarketWatch reported. However, "More retailers discount more heavily than in the past," warned Sherif Mityas, a partner at consultant A.T. Kearney. "What they are picking up in sales they are giving back in margins. This is not a fundamental shift that we've hit bottom and now all is rosy."

The annual problem with evaluating March and April same-store sales is the ever-shifting date of Easter. Plus, because of a quirk in the calendar, this April had one extra shopping day compared to a year ago. Combining March/April sales and comparing them with 2007 figures, the overall growth was only 1.5% percent, in line with the average sales growth since the beginning of the industry's fiscal year, the Associated Press reported.

According to PR Newswire, Jo-Ann's same store sales rose 4.5%.

April same-store sales figures from a sampling of retailers: Sam's Club, +6.6% ...Costco, +5% ... Family Dollar, +4.3% ... Kohl's, +3.5% ... Wal-Mart, +3.2% ... Target, +3.1% ... J.C. Penney, -1.7% ... Nieman Marcus, -1.9% ... Nordstrom, -3.8% (Reminder: Michaels, Hobby Lobby, and A.C. Moore do not report monthly sales figures.)

A number of retailers reported disappointing sales of jewelry. (Perhaps this could be a prime time for consumers to save money by making their own?)

March 19, 2008

MICHAELS' FOURTH QUARTER EARNINGS

Total sales for the quarter declined 4.4% to $1.301 billion from the fiscal 2006 fourth quarter, which was a 14-week quarter. The extra week a year ago accounted for $59 million. Same-store sales decreased 3.4%.

The gross margin rate is down to 40.0% versus 41.8% a year ago, due primarily to "lower sell-through of seasonal products and a de-leveraging of occupancy costs due to negative comparable-store sales performance," the company said. Selling, general, and administrative expenses (SG&A) as a percentage of sales were flat. Operating income increased to 15.4% of sales from 3.1% a year ago, primarily due to the absence of $218 million in merger-related, transaction, and related party expenses in the prior year, partly offset by a $22 million goodwill impairment charge related to the company's Aaron Brothers division.

Net income increased $120 million, from a net loss of $67 million to a net income of $53 million, primarily due to the absence of merger-related expenses. Adjusted EBITDA for the quarter was $266 million or 20.4% of sales.

CEO Brian Cornell said, "Sales performance in the fourth quarter was below the company's expectations as customer traffic was softer than planned and Christmas and holiday categories underperformed. While discretionary spending was down significantly on higher ticket, seasonal items, we experienced solid performance in many of our core business lines."

"In the face of a challenging fourth quarter sales environment," Cornell added, "we continued to operate prudently. Through aggressive efforts across the company, we were able to control costs, reduce our average store inventory levels, and strengthen our financial position, with a reduction in our debt level of approximately $100 million since last year and nearly $400 million since our peak post-closing level.

"Most importantly," Cornell concluded, "we continued to make significant progress on our key strategic initiatives, particularly the global sourcing and consumer insights programs. As a result, we are confident in our approach to drive long-term profitable growth as we capitalize on significant margin enhancement opportunities and begin to transition into a more consumer focused organization."

MICHAELS' FISCAL YEAR EARNINGS

Sales for the year rose 0.5% to $3.862 billion, but same-store sales decreased 0.7%. The gross margin rate decreased from 38.5% in fiscal 2006 to 38.3% in fiscal 2007, primarily due to the "de-leveraging of occupancy expense, which increased by 50 basis points as a percentage of sales," the company reported..

SG&A expenses as a percent of sales increased 50 basis points to 27.1%, primarily due to consulting fees and higher advertising expense. Operating income as a percent of sales increased from 5.4% to 9.2%, due to the absence of significant merger-related expenses.

Net income decreased $73 million from $41 million to a net loss of $32 million. Adjusted EBITDA was $587 million or 15.2% of sales, compared to $620 million or 16.1% a year ago.

The cash balance at the end of the year was $29 million, down $1 million from the previous year. Average inventory/Michaels store at the end of the fourth quarter, inclusive of distribution centers, was down 4.5% to $830,000, primarily due "to appropriate management of inventory in light of the challenging sales environment," the company said..

For the year, net cash provided by operating activities was up $111 million to $268 million. Capital spending was down $43 million to $100 million.

The debt level at year's end is down $96 million to $3.863 billion, and $392 million lower than the peak post-closing borrowing level of $4.255 billion on Nov. 9, 2006.

During the year the company opened 45 new Michaels stores, relocated 11, and closed three; it opened two and closed two Aaron Brothers stores; and closed its 11 Recollections and three Star Decorators' Wholesale stores. The current store count is 972 Michaels stores and 164 Aaron Brothers stores.

For this year same-store sales are expected to be flat and net cash from operations and Adjusted EBITDA are expected to be consistent with fiscal 2007 levels.

MICHAELS' CFO RESIGNS

Michaels also reported President/CFO Jeffrey Boyer will resign effective April 4. The company will conduct an internal and external search for a CFO; in the interim, Michaels named Sr. VP-Finance and Treasurer Lisa Klinger to be Acting CFO and VP Finance and Corporate Controller Richard Jablonski to be principle accounting officer.

February 17, 2008

CHA WINTER SHOW REPORT

If a trade show is produced and marketed effectively, then the show becomes an accurate reflection of the state of the industry. The Anaheim extravaganza was just such an event.

The show was smaller than last year. Some returning exhibitors took fewer booths and scrapbooking is not generating as many new vendors as it did a few years ago. Attendance was down, too. While final figures are not yet available, the number of buyers was down about 15%, due to the economy and a smaller number of scrapbook retailers. There was a large group of international buyers � not surprising given the weak U.S. dollar.

Mood. Better than expected: a) The national recession that's apparently looming on the horizon does not frighten our industry's independents; b) Many independents seemed to have a better holiday season than national chains such as Wal-Mart, Macy's, etc.; c) They were relatively pleased with January sales, too.

Scrapbooking. The aisles weren't as crowded, but a number of exhibitors said attendees placed larger orders than usual. ... At a CHA task force luncheon for scrapbook retailers, the consensus was that the category's top, crucial priority must be attracting new scrappers. ... Most attendees agreed scrapbooking seemed to be slipping. ... The Two Peas message boards are filled with positive, enthusiastic reports and photos from the show, while the Scrapsmack blog is filled with its typical negative, snide comments about the people and the products.

Crafts. Very little order writing, as usual. Many vendors to the chains are worried by the chains' increasing attempts to go direct to the Orient, particularly Michaels and A.C. Moore. To maintain relationships with the chains, U.S. vendors and importers will have to add value to their product lines. ... The extensive Crafty Chica line from Duncan was the most unique new line CLN saw at the show � the first attempt by a large vendor to address the growing Hispanic population. ... There seemed to be an increase in beads, wearable art, and basic products.

Miscellaneous. The industry is going green. There were enough new eco-friendly products to provide a year's worth of material for Creative Home Arts magazine's new column, "Make It Green." ... Those looking for "the next big thing" didn't find it. ... There was lots of talk about the Summer Show.

Summary. As is true at every show, most vendors who introduced appealing new products had a good show; those who didn't, didn't.

February 7, 2008

JANUARY RETAIL SALES: UH OH

National retailers generally reported disappointing sales last month, perhaps symbolized by Wal-Mart, which reported a 0.5% gain in same-store sales. Analysts surveyed by Thomson Financial had expected a 2.0% increase, the Associated Press reported. Same-store sales in U.S. Wal-Marts rose only 0.2% and the company predicted same-store sales in February would be flat to +2.%. Target's same-store sales declined 1.1%.

Industry retailers such as Michaels, Jo-Ann, and A.C. Moore do not report monthly sales figures.

Retailers blamed the economy, citing cases of consumers using gift cards to purchase necessities, the AP concluded. Wal-Mart said staples such as groceries remained strong, but home furnishing sales were weak. One of the few retailers to exceed analysts' expectations was Costco, which reported a 7.0% gain in same-store sales.

"Clearly, this is a reflection of a very difficult environment for the consumer," Ken Perkins, president of the research company RetailMetrics, told the AP. "It looks like consumer spending is stalling."

For the next several months traffic at the nation�s major retail container ports will see weak growth or a decline compared with last year due to the nation�s economic slowdown, according to the monthly Port Tracker report released by the National Retail Federation and Global Insight.

JO ANN REPORTS 4TH QUARTER, FISCAL YEAR SALES

Net sales for the fourth quarter ended Feb. 2 decreased 2.5% to $585.9 million but the previous year included a 53rd week, which added $28.8 million to last year's net sales results. On a comparable 13-week basis, fourth quarter same-store sales increased 3.3% versus a same-store sales decrease of 6.0% last year.

Net sales for fiscal year increased 1.5% to $1.879 billion. On a comparable 52-week basis, same-store sales increased 3.5% versus a same-store sales decrease of 5.9% last year. Jo-Ann will report its fourth quarter and full-year results Mar. 12.

December, 2007

HOME SEWING ASSOCIATION SHUTS DOWN

Creative Leisure News received the following press release from HSA:

We regret to advise you that after 80+ years of service to the sewing industry, the Home Sewing Association will officially close its doors at the end of the year.

As your elected representatives, we have endeavored to keep the Association operating to fulfill its mission to "Get People Sewing!" Recent marketing programs � including Sew Trendy, Trained Sewing Educator and the Girl Scout kit promotion have shown great promise. In addition, members and sewers alike have benefited from our informative newsletters and website, together with our range of industry and consumer services.

However, we have not been able to absorb the costs � and potential liabilities � of a wrongful termination lawsuit which was filed against the Home Sewing Association in 1996. The lawsuit was tried before a jury in the state of New York in October 2006 and an unfavorable verdict was rendered against HSA.

The Board has engaged in a year-long assessment of the options available to deal with this unfavorable judgment and the additional cost of an award for plaintiff�s attorney�s fees in the case. It is our determination that the Association can no longer provide a viable level of industry service given this enormous financial burden.

Therefore, the Board of Directors of the Home Sewing Association has made the difficult decision to cease operations as of December 31, 2007. The dissolution of the Association and its remaining assets, such as the National Sewing Show, will be managed under the guidance of a chapter 7 bankruptcy of the Court of New York. Updates will be provided when information becomes available from the Trustee on the disposition of assets. We will be filing a bankruptcy petition for HSA in that court shortly.

We wish to thank you for your membership support and wish you continued success in your sewing industry endeavors in the years ahead.

Sincerely,

Dan Covitt, A.E. Nathan & Co.
Stephanie Dell�Olio, Marcus Fabrics
Martin Favre, Bernina of America
Jim Hankins, Textile Creations
Eric Herman, Air-Lite Manufacturing
Peter Isaacson, Fabric Place
Eric McMaster, Kwik Sew Pattern Co., Inc.
June Mellinger, Brother International
Johan Starrenburg, Prym Consumer USA, Inc.
Dale Sutherland, Coats & Clark
Andrew Sylvia, Cranston

July 24, 2007

CHA SUMMER SHOW REPORT

The vast majority of exhibitors were very pleased. Attendance appeared up; the Sunday afternoon crowd was the largest in recent memory. The weather was the best ever in the 30-some year history of the show.

Attendees were talking: After last week's notice that Wal-Mart was dropping "stitchery," the chain's remaining vendors were wondering who, if anyone, would be next. ... The word was that knitting/crochet was not part of what Wal-Mart called "stitchery." ... The general consensus of the numerous exhibitors interviewed by CLN was that they were going to choose the CHA Winter Show rather than the PMA show.

Scrapbooking still dominated the show, but there was an increased emphasis on paper crafts and digital scrapbooking, vendors showing how their products could be used in "craft" projects, and scrapbook retailers interested in expanding their inventory to other crafts.

WILTON, DIMENSIONS, AND EK SUCCESS

TheDeal.com reported that GTCR Golder Rauner, who bought EK Success in 2006 for about $200 million, is sponsoring a $1 billion recapitalization of EK Success to finance the acquisitions of Wilton and Dimensions.

CLN contacted the companies involved and they declined comment, citing confidentiality agreements. In other words, the deals have not been completed, but are close.

July 17

WAL-MART IS DROPPING STITCHERY

Wal-Mart's needlework vendors received the following from the company:

"As just discussed, you are aware that we are downsizing departments with declining categories. We continue to reduce space in these categories to allow for increased space in growth categories. As a result we continue to evaluate and where appropriate make adjustments as needed. As a result in week 34 this year, we will be deleting stitchery from 2642 stores. Our goal is to be out of stitchery 100% by Fall 2008. Please make adjustments in your forecasts and inventory using the spreadsheet attached outlining by item current and new store count for week 34."

One vendor told CLN: "Mike, what is very sad is they gave us all NO clue. We all have goods on the way from China, etc., and they tell us they are getting out of today.... They will cut off orders this week leaving us all with goods. Can you believe I am coming off my best month in a year. Just when I was seeing some light at the end of the tunnel I am slammed with a 2x4 plank!"

July 10, 2007

CHAIN STORE EXEC CHANGES

1. A.C. Moore named industry veteran Craig Davis Sr. as VP of Merchandising and Marketing effective July 30. Since 2006, Davis served as VP, General Merchandise Manager, Retail for the Cracker Barrel restaurant chain, but before that he was VP and General Merchandise Manager for Jo-Ann's, Divisional Merchandise Manager for Garden Ridge, and held senior management positions with retailers such as Metropolitan Plant and Flower. and LeeWards.

President/CEO Rick A. Lepley said, "... [Davis] brings to A.C. Moore extensive industry knowledge and skills, as well as experience in the implementation of retail merchandising systems. We believe that Craig will be integral to the enhancement of our merchandising and marketing strategy to drive sales and improve margin."

2. Michaels President/COO Greg Sandfort has resigned effective July 27. "At this time, we will not fill Greg's position," said CEO Brian Cornell. "As I am just getting up to speed in my role, it makes sense for me to be more directly involved in the areas Greg previously led. Jeff Boyer, of course, will continue in his role as President and CFO."

Sandfort, who joined Michaels in 2004 as Exec VP-General Merchandise Manager and was promoted to President/COO in 2006, said, "I'm really proud of what the team and I accomplished over the past few years. We've really led a transformation in our company to rethink the merchandise we sell and how we present that merchandise to the customer. I feel that this is the perfect time to make a change for me � we have a great team in place, our major initiatives are underway, and we are poised for an amazing future."

June 4, 2007

MICHAELS NAMES NEW CEO

Michaels named Brian Cornell as CEO. President/CFO Jeffrey Boyer and President/COO Gregory Sandfort will remain and report to Cornell.

Cornell most recently served as Exec VP/Chief Marketing Officer of Safeway, where he had responsibility for the merchandising, marketing, manufacturing, supply chain, and online business. In 2005, he was named "Marketing Executive of the Year" by Supermarket News, and was featured as the "Retailer of the Year" by Grocery Headquarters Magazine in 2006.

Prior to joining Safeway in 2004, Cornell served as President of Pepsi-Cola North America's Foodservice Division, and as Sr. VP of Sales for Pepsi-Cola North America.

Cornell, 48, said, "I am excited about the opportunity to join this best-in-class specialty retailer, and to further advance Michaels Stores' leadership position and brand recognition through focused merchandising, consumer insights, marketing, and operating initiatives. I am pleased to work with Michaels' employees, management team and our vendor partners to position the company for the long term, and create unparalleled shopping experiences for our customers."

ADVANTUS ACQUIRES AMM

Advantus has acquired the product lines of AMM (formerly All My Memories), including the Tote-ally Cool Tote and Tot-ally Cool Tote 2 lines, and the Vituri Lifestyles, Vituri Camera Bags, and Vituri Urban lines. The Metro and Urban albums and the Stackem� product lines were not included in the acquisition.

All operations will be consolidated and relocated to the Advantus headquarters in Jacksonville, FL. Execs expect to resume shipping June 11.

Distributors carrying AMM products include Notions Marketing, Provo Craft, and Rogers Supply in the U.S., and Memories Wholesale, Open Page Wholesalers, and Scrapbook Eh? in Canada.

Advantus is the owner of Cropper Hopper, Heidi Swapp, Tim Holtz, and L&B (Lisa Bearnson and Becky Higgins) product lines. For more info, call Advantus at 904-482-0092.

June 1, 2007

JO-ANN'S: "AN IMPORTANT MILESTONE" (BUT FOR SALE?)

Jo-Ann's reported a strong improvement in the first quarter, but TheDeal.com, a trade newsletter for the mergers/acquisitions industry, reported the company is up for sale.

Citing three unnamed sources, The Deal said Lehman Brothers had been hired to approach middle-market private equity firms and conduct an auction, with final bids due in June.

"Considering that the company would most likely be taken private for a premium to its share price," wrote The Deal, "a leveraged buyout would probably value it at slightly less than $1 billion, including long-term debt."

The share price jumped $0.99 the day Jo-Ann's announced its first-quarter earnings, and rose $2.87 by noon the following day.

Jo-Ann's officials declined to comment for this article.

For its first quarter ended May 5, Jo-Ann's announced a net loss of $1.7 million (-$0.07/per diluted share), compared with a net loss of $6.6 million (-$0.28) a year ago. Net sales decreased 0.1% to $424.2 million, but same-store sales rose 1.8% for the quarter, versus a same-store sales decrease of 3.9% last year. Analysts had expected a loss of $0.07 on sales of $435.4 million, Reuters reported.

Gross margins increased 70 basis points to 47.3% from 46.6% primarily due to reduced sales of clearance inventory. Selling, general, and administrative expenses decreased to $185.5 million, or 43.7% of net sales, down from 44.7% last year. The operating profit was $0.1 million, versus an $8.8 million loss last year.

Chair/President/CEO Darrell Webb said, "The first quarter produced an important milestone, as we achieved positive same-store sales for the first time in six quarters, and also expanded our gross margin rate. Our strategic plan is on-track and we continue to execute the initiatives designed to generate profitable and sustainable sales growth over the long term. While it is still early in the fiscal year, I am pleased with the progress we have made to improve the customer shopping experience, enhance our marketing and merchandising programs, and refine our capital investment strategy."

The company opened two superstores and one traditional store and closed 10 traditional stores. For the balance of the year, the company expects to open three superstores and close 13 traditional stores and one superstore. The current store count is 619 traditional stores and 175 superstores.

For the remainder of the year, the company expects improvement in same-store sales and gross margin, capital spending to be $32-$38 million, expenses as a percentage of net sales to be flat, and earnings to be $0.55-$0.65/share for the year.

MICHAELS: MARGINS UP, INCOME DOWN

For the first quarter ended May 5, net income decreased $74.3 million, primarily due to added interest expense and incremental SG&A and related expenses, from $51.7 million a year ago to a net loss of $22.6 million this year.

Total sales rose 1.4% to $844 million, but same-store sales decreased 0.5%, due to a 3.5% increase in average ticket, a 4.2% decrease in transactions, and a 0.2% increase in custom framing deliveries. The company said a decline in yarn sales hurt same-store sales by approximately 0.8%.

The gross margin rate increased 50 basis points to 38.8% and the merchandise margin increased 150 basis points due to a reduction in the depth of its promotional programs and the benefits of its ongoing product sourcing initiative. Occupancy costs as a percent of sales increased, primarily due to higher relative maintenance and utility expenses and a de-leveraging of rent expense. Operating income decreased as a percent of sales, from 9.1% in the first quarter 2006 to 7.0% this year.

During the first quarter, Michaels opened 11 new stores, relocated five, remodeled 22, and closed three. It also opened two new Aaron Brothers stores. The current store count: 928 Michaels stores, 168 Aaron Brothers stores, 11 Recollections stores, and 4 Star Decorators Wholesale operations.

For the second quarter, management expects same-store sales to rise 1%-2% and total sales to increase 3%-4%. Operating income is expected to be approximately $28.0 million, down from $31.5 million. Merchandise margin increases will be offset by increased occupancy costs and incremental spending for market-driven cash compensation costs, consulting services, management fees, and ongoing transaction expenses.

For the full fiscal year, same-store sales are expected to increase 1%-3%, and total sales to rise 3%- 5%. Gross margin is expected to increase by 30 basis points driven primarily by merchandise margin expansion.

RAG SHOP SHUTTING DOWN

Sun Capital, the parent company of Rag Shop, has asked a bankruptcy judge for approval to let it sell the rights to conduct going-out-business sales at 61 Rag Shops and to auction the stores' leases, the Houston Chronicle reported. The company told the judge it doesn't have enough money to continue operations past June and will lose $1 million between the bankruptcy filing May 2 and the end of this month.

The original bankruptcy filing listed assets of $35.3 million and liabilities of about $52.5 million. The two largest secured creditors � who will be paid in full before any payments to made to unsecured creditors such as vendors � are Sun Capital, owed $22.7 million, and Wells Fargo, owed $14.6 million.

CONGRESS APPROVES MINIMUM WAGE HIKE

Congress approved and President Bush signed the first increase in the federal minimum wage in almost a decade, boosting the wage from $5.15 to $7.25 an hour over the next two years. It marks the end of the longest period without an increase since it was established in 1938.

The wage hike, which had been languishing in Congress, was attached to the emergency appropriations bill for Iraq and Afghanistan. The first increase, to $5.85 an hour, becomes law within two months. A year later, the minimum wage rises to $6.55 an hour, and then $7.25 in 2009. The legislation also includes tax breaks worth $4.8 billion over 10 years, the Washington Post reported. More than half of that would pay for an extension and expansion of a tax-credit program for employers who hire former welfare recipients, at-risk youths, and others. The measure also extends a law that allows small business to quickly deduct $125,000 for equipment purchases, up from $115,000.

xxx